4:09 pm

Mon December 30, 2013

$0 Profits Couldn't Hold Back This Year's Tech Darlings

Twitter made its debut on the New York Stock Exchange in November. Both the social media giant and the relative newcomer Snapchat are valued in the billions, but neither company has yet turned a profit.

Emmanuel DunandAFP/Getty Images

Zero. That's the total amount of revenue created by Snapchat in 2013. It's the total profit collected by Twitter. And it's roughly how much Apple's stock price has increased between early last December and now.

Which makes you wonder: With all these zeros piling up, how are so many people in Silicon Valley making so much money from technology?

"Well, it gets complicated," says Jim Jubak, a portfolio manager at Jubak Global Equity Fund who has invested in Apple and other tech companies in the past. "It's all very, very future-oriented. It's like, 'OK, so where are we going to be in a year?' "

In other words, when it comes to valuing technology companies, profits and even revenue often matter less than what analysts and investors predict about the future: Is the company growing, and how fast?

So let's start with Snapchat, the baby of this group. The company is just a couple of years old and lets users send pictures that disappear to friends. It's become widely popular. But it also has, as Anant Sundaram, a corporate valuation expert at Dartmouth's Tuck School of Business, says, laughing: "No revenues, as far as I know."

What gives him the giggles is the fact that Snapchat is attracting takeover offers in the billions.

"If the rumors are to be believed, there was a $3 billion bid from Facebook for the company and a $4 billion bid from Google for the company," he says.

Just to be clear, when Sundaram says Snapchat has no revenue, he means that no one pays the company any money for anything.

When I ask Sundaram what it would take for that type of valuation to make sense, I get dead silence.

"Um, the reason I am hesitating in replying," he finally answers, "is that I cannot think of any possible scenario under which this kind of a valuation makes sense. ... All I can do is scratch my head."

Snapchat didn't respond to a request for comment.

Valuations Driven By 'Psychology, Fads, Sentiment'?

It's not like Sundaram is a Luddite or some kind of technology skeptic. Just a few years ago, he was widely mocked for arguing that Twitter was worth more than $1 billion. Still, what's going on with startups like Snapchat today is leaving him speechless.

Juback, on the other hand, sees an explanation: Facebook's fear.

If you are Facebook, nothing can hurt you more than a social media startup that has the potential to knock you off your pedestal, he says.

"This is a relatively good investment, because you're talking about a few billion dollars to make sure your company doesn't get blindsided," Juback says. "And in those terms, it makes sense."

But Facebook's free-spending ways have created an investment bubble in Silicon Valley, Sundaram says. "Any valuation bets are off, frankly," he says.

Take Twitter: The company has never recorded a profit. It expects revenue of roughly $600 million this year — but last week it was briefly valued at more than $40 billion.

"We are talking about a price that is a substantial overvaluation, relative to the fundamentals," Sundaram says. "And what drives that — who knows? It's psychology, fads, sentiment ... the list goes on."

Sundaram says this is a classic bubble — one that may be popping right now. So I asked Jubak to peer into his crystal ball and predict where this investment frenzy is headed.

"It's an Apple crystal ball, by the way," he jokes. "It's their next product. We are doing advanced testing."

The truth is, even an imaginary Apple crystal ball can't predict the future. And when investment predictions are driven by fortune tellers, they typically fail to make much sense.

Just ask Apple itself. That company is on track to bring in more than $170 billion in revenue this year and stands to earn $37 billion in profits — and its stock price has been flat or falling.

Copyright 2013 NPR. To see more, visit http://www.npr.org/.

Transcript

ROBERT SIEGEL, HOST:

This ALL THINGS CONSIDERED from NPR News. I'm Robert Siegel.

AUDIE CORNISH, HOST:

I'm Audie Cornish and it's time now for All Tech Considered.

(SOUNDBITE OF THEME MUSIC)

CORNISH: We kick things off today with the latest entry in our series Number of the Year, where we use numbers to tell the biggest stories of 2013. And today, we're talking about zip, zilch, nada, also known as zero.

Here's NPR's tech correspondent Steve Henn.

STEVE HENN, BYLINE: If you cover computer technology and you're doing a story on the Number of the Year, you really just have two choices: zero or one. And I'm picking zero. Zero is the total amount of revenue created by Snapchat in 2013. Zero is the total profit collected by Twitter. And zero is roughly how much Apple's stock price increased from early December of last year through December of this year. Which kind of makes you wonder, with all these zeros piling up, how are so many people in Silicon Valley making so much money from technology?

JIM JUBAK: Well, I mean, it gets complicated.

HENN: Jim Jubak is a portfolio manager at Jubak Global Equity. He's invested in Apple and other tech companies in the past.

JUBAK: It's all very, very future oriented. It's like, OK, so where are we going to be in a year?

HENN: When it comes to valuing a technology company, profits and even revenue often matter less than what analysts or investors predict about the future. Is the company growing? How fast?

So let's start with Snapchat, the baby of my little group. This company is just a couple years old and it let's you send pictures to friends that disappear. Snapchat has become widely popular. But it has...

ANANT SUNDARAM: No revenues, as far as I know.

(LAUGHTER)

HENN: That's Anant Sundaram. He's a corporate valuation expert at Dartmouth's Tuck School of Business. And what has given him the giggles is the fact that Snapchat is attracting take over offers in the billions.

SUNDARAM: If the rumors are to be believed, apparently there was a $3 billion bid from Facebook for the company and a $4 billion bid from Google for the company. And, yeah.

HENN: Just to be clear, when Anant Sundaram says Snapchat has no revenue, that means that no on pays the company any money for anything. So I ask, what would it take for that type of valuation to make sense?

(SOUNDBITE OF SILENCE)

HENN: Or is that impossible? You seem stumped.

SUNDARAM: I-I-I - the reason I am hesitating, Steve, is I cannot think of any possible scenario under which this kind of a valuation makes sense. And I said, all I can do is scratch my head.

HENN: Snapchat didn't respond to a request for comment. But it's not like Anant Sundaram is a Luddite or some kind of technology skeptic. Just a few years ago, he was widely mocked for arguing Twitter was worth more than a billion dollars. Still, what's going up with start-ups like Snapchat today leaves him speechless.

Jim Juback, however, sees an explanation: Facebook's fear.

JUBAK: This is a relatively good investment because, you know, you're talking about a few billion dollars to make sure your company doesn't get blindsided.

HENN: If you're Facebook, nothing is a can hurt you more than a social media start-up that has the potential to knock you off your pedestal.

JUBAK: In those terms it makes sense.

HENN: But Facebook's free spending ways have created an investment bubble in Silicon Valley, according to Sundaram.

SUNDARAM: Any valuation bets are off, frankly.

HENN: Take Twitter. That company has never recorded a profit. It expects revenue of roughly $600 million this year. But last week, it was briefly valued at more than $40 billion.

SUNDARAM: We are talking about, you know, a price that is a substantial overvaluation relative to the fundamentals. And what drives that, who knows? It's psychology, fad, sentiment - the list goes on.

HENN: Sundaram says this is a classic bubble, one which may be popping as I speak. So I asked Jim Jubak to peer into his crystal ball and predict where this investment frenzy is headed.

JUBAK: It's an Apple crystal ball, by the way.

(LAUGHTER)

JUBAK: It is their next product. We are doing advanced testing.

(LAUGHTER)

HENN: The truth is even an imaginary Apple crystal ball can't predict the future. And when investment predictions are driven by fortunetellers, they typically fail to make much sense. Just ask Apple itself. That company is on track to bring in more than $170 billion in revenue this year. It stands to earn $37 billion in profits and its stock price is flat or falling.